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The Lovelace Case MADI AND DEVON LOVELACE BACKGROUND Madi and Devon Lovelace, both age 63, have been married for 40 years, are both in good health, and they are citizens and residents of Louisiana. They expect to work until age 66 to 70. Madi and Devon live in a community property state. They have the following children and grandchildren: hildren Age Grandchildren zabeth 404 children ages 15. 14, 13 & 12) mes 35 3hren ages 5.3 & 1) Lynn Deceased 1 child Elizabeth, an estate planning attorney, is married, healthy, and happy. Madi and Devon adore Elizabeth's husband, Scott, and their four children. James, a high net worth investment consultant, was recently divorced and his ex-wife, Catherine, has custody of their three children. Madi and Devon, never quite cared for Catherine, as she always seemed to be quite snooty. Since the divorce, the relationship between Madi and Catherine has been very strained. Since his divorce. James has had somewhat of a mid-life crisis. He recently rented a penthouse apartment and bought a new Jaguar. James has also been dating Natalie, a 21-year-old swimsuit model. While Madi and Devon are confident that this is only a passing phase, they are concerned about giving any gifts outright to James or his children. Lynn, Madi and Devon's third child, was a bit of a wild child. Lynn died in a tragic motorcycle accident in her senior year of college while on her way home to tell her parents about a big secret she had been keeping. The summer before, Lynn had given birth to a baby girl named Marie. At the time, Lynn gave the baby to the baby's father, an older married man, although no official adoption was ever transacted. Madi and Devon still do not know about Marie. Madi and Devon own Fresh Veggies, a popular organic health food store in a general partnership with another couple located in Louisiana. Scott, Elizabeth's husband, has worked at the store since he was a kid. Scott is now one of the store managers who continues along with the other partners to direct the company as executives. Madi and Devon would like to reward Scott for all of his hard work by giving Scott and Elizabeth 3/4 of their interest in the business and giving the remaining 1/4 of their interest in the business to James. They do not want James to have any control over the business, just to have an income interest. Elizabeth's youngest child, Andrew, was born with a serious Elizabeth's youngest child, Andrew, was born with a serious physical disability. To provide additional support for Andrew, Devon created an irrevocable trust with Andrew as the sole beneficiary with an $8,015,000 transfer of separate property 5 years ago. The trust meets the requirements of Section 2503(c). Assume for any calculation of GSTT that the annual exclusion was $15,000 and the lifetime exemption was $11,580,000. Also assume that the GSTT and gift tax rates were 40% for determination of GSTT even though they were paid 5 years prior. Devon and Madi made the following additional lifetime transfers: . Four years ago, Devon gave Elizabeth, James, and their spouses $100,000 each (assume the annual exclusion at the time was $11,000) of community property. Two years ago, Devon gave Elizabeth, James, and their spouses $200,000 each of his separate property. Devon paid gift tax of $347.760 on these gifts. Madi and Devon have never elected to split gifts of separate property Devon and Madi estimate the following at each of their deaths: The last illness and funeral expenses are expected to be $100,000 per person. Estate administration expenses are estimated at $250,000 per person. WILLS Madi does not have a will. Devon has an outdated will leaving most of his probate assets to Madi. Clauses from Devon's Statutory Last Will and Testament I. Devon, being of sound mind and wishing to make proper disposition of my property in the event of my death, do declare this to be my Last Will and Testament. I revoke all of my prior wills and codicils. 1. I have been married but once, and only to Madi with whom I am presently living. Out of my marriage to Madi, three children were born, namely Elizabeth, James and Lynn. have adopted no one nor has anyone adopted me. 2. I leave my Vintage Mustang and House Boat to my son, James. 3. I leave the life insurance proceeds on my life to my daughter, Elizabeth. 4. I leave Vacation Home 1 to my daughter, Lynn. 5. I leave Auto 1 to the Methodist Church, a qualified charity. 6. I give the residual of my estate to Madi, my wife. 7. In the event that Madi predeceases me or fails to survive 4. I leave Vacation Home 1 to my daughter, Lynn 5. I leave Auto 1 to the Methodist Church, a qualified charity. 6. I give the residual of my estate to Madi, my wife. 7. In the event that Madi predeceases me or fails to survive me for more than six (6) months from the date of my death, I leave any interest of my estate determined to be payable to her to my children, Elizabeth, James and Lynn, in equal and 1/3 shares. 8. In the event that any of the named legatees should predecease me, die within six months from the date of my death, disclaim, or otherwise fail to accept any property bequeathed to him or her, then such interest will pass to the said legatee's descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among the surviving named legatees. 9. I name my best friend Keith to serve as the executor of my succession with full seizin and without bond. 10. I direct that the expenses of my last illness, funeral, and the administration of my estate shall be paid by my executor as soon as practicable after my death and allocated against the residual estate. 11. Since I have made numerous lifetime gifts to my children, all inheritance, estate, succession, transfer, and other taxes (including interest and penalties thereon) payable by reason of my death shall be allocated to the children's share, regardless of whether my spouse survives me. Statement of Financial Position (Devon and Madi Lovelace) ASSETS LIABILITIES AND NET WORTH Cash & Cash Equivalents Liutales CP Cash $150 000 Current Liabilities Total Cash Cash Equiv. $150 000 CP Credit Card 1 CP Credit Card 2 55.000 Invested Assets Total Current Labs 521000 CP Fresh Veggies $4.000.000 CP Investment Portfolio $13.000.000 Long-Term Liabilities H Life Insurance on Devon $1.000.000 CP Mongage-Primary Residence $750 000 CP Rental Property $500 000 CP Rental Property $300.000 Total investments $16.500.000 W Auto 2 $10.000 Total Long-Term Labs 31.120.000 Personal Use Assets CP Primary Residence $1 500 000 H Vacation Home 1 $950.000 Total Liabilities $1.141.000 W Vacation Home 2 $500 000 CP Personal Property $900.000 $70 000 Net Worth 522 68,000 W Auto 2 S60 000 H Vintage Mustang $80.000 H Yacht $900 000 Total Personal Use 54.900.000 Total Assets $23.610.000 Total Liabilities and Net 523.610.000 1. Assets are stated at fair market value (rounded to even dollars). 2. Liabilities are stated at principal only (rounded to even dollars). 3. The adjusted basis of the primary residence is $600,000 4. Madi received vacation home 2 from her grandmother, Lois. Madi and Lois were always very close and Lois gave her the home when izabeth was first homo Marcould M. TIGO NO TOMCIDUSMUMS 0 COTCH all inheritance, estate, succession, transfer, and other taxes (including interest and penalties thereon) payable by reason of my death shall be allocated to the children's share, regardless of whether my spouse survives me. (Devon and Madi Statement of Financial Position Lovelace) ASSETS LIABILITIES AND NET WORTH Cash & Cash Equivalents Liabilities CP Cash $150.000 Current Liabilities Total Cash Cash Equi, $150,000 CP Credit Card 1 $16.000 CP Credit Card 2 $5,000 Invested Assets Total Current Liabilities $21,000 CP Fresh Veggies $4,000,000 CP Investment Portfolio $13.000.000 Long-Term Liabilities H Life Insurance on Devon $1,000,000 CP Mortgage-Primary Residence $750,000 CP Rental Property $100,000 CPRental Property $300,000 Total Investments $18.500.000 W Auto 2 $70.000 Total Long-Term Liabilities $1,120,000 Personal use Assets CP Primary Residence $1.500,000 H Vacation Home 1 $950,000 Total Liabilities $1,141,000 w Vacation Home 2 $500,000 CP Personal Property S900.000 H Auto 1 $70,000 Net Worth $22.460.000 W Auto 2 560.000 H Vintage Mustang $80.000 5.000.000 Total Personal use $4.969.000 Total Assets $23.610.000 Total Liabilities and Net $23.610.000 1. Assets are stated at fair market value (rounded to even dollars). 2. Liabilities are stated at principal only (rounded to even dollars). 3. The adjusted basis of the primary residence is $600,000. 4. Madi received vacation home 2 from her grandmother, Lois. Madi and Lois were always very close and Lois gave her the home when Elizabeth was first born so Madi could enjoy motherhood as much as Lois had. Lois purchased the vacation home for $30,000 and the FMV of the home at the date of transfer was $200,000. The FMV when Lois died was $250,000. 5. The life insurance policy has Madi listed as the designated beneficiary. The Investment account is a Transfer on Death account with Elizabeth and James as the listed beneficiaries of both Devon and Madi's shares. 6. The Yacht was purchased by Devon after his House Boat was destroyed by a Hurricane. 7. Property Ownership: . CP - Community Property H- Husband separate .W-Wife separate 8. The insurance face value (death benefit) and the cash value of $1,000,000 are the same. The Lovelace Case MADI AND DEVON LOVELACE BACKGROUND Madi and Devon Lovelace, both age 63, have been married for 40 years, are both in good health, and they are citizens and residents of Louisiana. They expect to work until age 66 to 70. Madi and Devon live in a community property state. They have the following children and grandchildren: hildren Age Grandchildren zabeth 404 children ages 15. 14, 13 & 12) mes 35 3hren ages 5.3 & 1) Lynn Deceased 1 child Elizabeth, an estate planning attorney, is married, healthy, and happy. Madi and Devon adore Elizabeth's husband, Scott, and their four children. James, a high net worth investment consultant, was recently divorced and his ex-wife, Catherine, has custody of their three children. Madi and Devon, never quite cared for Catherine, as she always seemed to be quite snooty. Since the divorce, the relationship between Madi and Catherine has been very strained. Since his divorce. James has had somewhat of a mid-life crisis. He recently rented a penthouse apartment and bought a new Jaguar. James has also been dating Natalie, a 21-year-old swimsuit model. While Madi and Devon are confident that this is only a passing phase, they are concerned about giving any gifts outright to James or his children. Lynn, Madi and Devon's third child, was a bit of a wild child. Lynn died in a tragic motorcycle accident in her senior year of college while on her way home to tell her parents about a big secret she had been keeping. The summer before, Lynn had given birth to a baby girl named Marie. At the time, Lynn gave the baby to the baby's father, an older married man, although no official adoption was ever transacted. Madi and Devon still do not know about Marie. Madi and Devon own Fresh Veggies, a popular organic health food store in a general partnership with another couple located in Louisiana. Scott, Elizabeth's husband, has worked at the store since he was a kid. Scott is now one of the store managers who continues along with the other partners to direct the company as executives. Madi and Devon would like to reward Scott for all of his hard work by giving Scott and Elizabeth 3/4 of their interest in the business and giving the remaining 1/4 of their interest in the business to James. They do not want James to have any control over the business, just to have an income interest. Elizabeth's youngest child, Andrew, was born with a serious Elizabeth's youngest child, Andrew, was born with a serious physical disability. To provide additional support for Andrew, Devon created an irrevocable trust with Andrew as the sole beneficiary with an $8,015,000 transfer of separate property 5 years ago. The trust meets the requirements of Section 2503(c). Assume for any calculation of GSTT that the annual exclusion was $15,000 and the lifetime exemption was $11,580,000. Also assume that the GSTT and gift tax rates were 40% for determination of GSTT even though they were paid 5 years prior. Devon and Madi made the following additional lifetime transfers: . Four years ago, Devon gave Elizabeth, James, and their spouses $100,000 each (assume the annual exclusion at the time was $11,000) of community property. Two years ago, Devon gave Elizabeth, James, and their spouses $200,000 each of his separate property. Devon paid gift tax of $347.760 on these gifts. Madi and Devon have never elected to split gifts of separate property Devon and Madi estimate the following at each of their deaths: The last illness and funeral expenses are expected to be $100,000 per person. Estate administration expenses are estimated at $250,000 per person. WILLS Madi does not have a will. Devon has an outdated will leaving most of his probate assets to Madi. Clauses from Devon's Statutory Last Will and Testament I. Devon, being of sound mind and wishing to make proper disposition of my property in the event of my death, do declare this to be my Last Will and Testament. I revoke all of my prior wills and codicils. 1. I have been married but once, and only to Madi with whom I am presently living. Out of my marriage to Madi, three children were born, namely Elizabeth, James and Lynn. have adopted no one nor has anyone adopted me. 2. I leave my Vintage Mustang and House Boat to my son, James. 3. I leave the life insurance proceeds on my life to my daughter, Elizabeth. 4. I leave Vacation Home 1 to my daughter, Lynn. 5. I leave Auto 1 to the Methodist Church, a qualified charity. 6. I give the residual of my estate to Madi, my wife. 7. In the event that Madi predeceases me or fails to survive 4. I leave Vacation Home 1 to my daughter, Lynn 5. I leave Auto 1 to the Methodist Church, a qualified charity. 6. I give the residual of my estate to Madi, my wife. 7. In the event that Madi predeceases me or fails to survive me for more than six (6) months from the date of my death, I leave any interest of my estate determined to be payable to her to my children, Elizabeth, James and Lynn, in equal and 1/3 shares. 8. In the event that any of the named legatees should predecease me, die within six months from the date of my death, disclaim, or otherwise fail to accept any property bequeathed to him or her, then such interest will pass to the said legatee's descendants, otherwise his or her share of all of my property of which I die possessed shall be paid equally among the surviving named legatees. 9. I name my best friend Keith to serve as the executor of my succession with full seizin and without bond. 10. I direct that the expenses of my last illness, funeral, and the administration of my estate shall be paid by my executor as soon as practicable after my death and allocated against the residual estate. 11. Since I have made numerous lifetime gifts to my children, all inheritance, estate, succession, transfer, and other taxes (including interest and penalties thereon) payable by reason of my death shall be allocated to the children's share, regardless of whether my spouse survives me. Statement of Financial Position (Devon and Madi Lovelace) ASSETS LIABILITIES AND NET WORTH Cash & Cash Equivalents Liutales CP Cash $150 000 Current Liabilities Total Cash Cash Equiv. $150 000 CP Credit Card 1 CP Credit Card 2 55.000 Invested Assets Total Current Labs 521000 CP Fresh Veggies $4.000.000 CP Investment Portfolio $13.000.000 Long-Term Liabilities H Life Insurance on Devon $1.000.000 CP Mongage-Primary Residence $750 000 CP Rental Property $500 000 CP Rental Property $300.000 Total investments $16.500.000 W Auto 2 $10.000 Total Long-Term Labs 31.120.000 Personal Use Assets CP Primary Residence $1 500 000 H Vacation Home 1 $950.000 Total Liabilities $1.141.000 W Vacation Home 2 $500 000 CP Personal Property $900.000 $70 000 Net Worth 522 68,000 W Auto 2 S60 000 H Vintage Mustang $80.000 H Yacht $900 000 Total Personal Use 54.900.000 Total Assets $23.610.000 Total Liabilities and Net 523.610.000 1. Assets are stated at fair market value (rounded to even dollars). 2. Liabilities are stated at principal only (rounded to even dollars). 3. The adjusted basis of the primary residence is $600,000 4. Madi received vacation home 2 from her grandmother, Lois. Madi and Lois were always very close and Lois gave her the home when izabeth was first homo Marcould M. TIGO NO TOMCIDUSMUMS 0 COTCH all inheritance, estate, succession, transfer, and other taxes (including interest and penalties thereon) payable by reason of my death shall be allocated to the children's share, regardless of whether my spouse survives me. (Devon and Madi Statement of Financial Position Lovelace) ASSETS LIABILITIES AND NET WORTH Cash & Cash Equivalents Liabilities CP Cash $150.000 Current Liabilities Total Cash Cash Equi, $150,000 CP Credit Card 1 $16.000 CP Credit Card 2 $5,000 Invested Assets Total Current Liabilities $21,000 CP Fresh Veggies $4,000,000 CP Investment Portfolio $13.000.000 Long-Term Liabilities H Life Insurance on Devon $1,000,000 CP Mortgage-Primary Residence $750,000 CP Rental Property $100,000 CPRental Property $300,000 Total Investments $18.500.000 W Auto 2 $70.000 Total Long-Term Liabilities $1,120,000 Personal use Assets CP Primary Residence $1.500,000 H Vacation Home 1 $950,000 Total Liabilities $1,141,000 w Vacation Home 2 $500,000 CP Personal Property S900.000 H Auto 1 $70,000 Net Worth $22.460.000 W Auto 2 560.000 H Vintage Mustang $80.000 5.000.000 Total Personal use $4.969.000 Total Assets $23.610.000 Total Liabilities and Net $23.610.000 1. Assets are stated at fair market value (rounded to even dollars). 2. Liabilities are stated at principal only (rounded to even dollars). 3. The adjusted basis of the primary residence is $600,000. 4. Madi received vacation home 2 from her grandmother, Lois. Madi and Lois were always very close and Lois gave her the home when Elizabeth was first born so Madi could enjoy motherhood as much as Lois had. Lois purchased the vacation home for $30,000 and the FMV of the home at the date of transfer was $200,000. The FMV when Lois died was $250,000. 5. The life insurance policy has Madi listed as the designated beneficiary. The Investment account is a Transfer on Death account with Elizabeth and James as the listed beneficiaries of both Devon and Madi's shares. 6. The Yacht was purchased by Devon after his House Boat was destroyed by a Hurricane. 7. Property Ownership: . CP - Community Property H- Husband separate .W-Wife separate 8. The insurance face value (death benefit) and the cash value of $1,000,000 are the same